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Episode 47 Transcript: Dividing Retirement Assets

In this episode, I wanted to revisit a topic that we spoke about briefly in Episode 15, and that is the topic of retirement accounts. Retirement assets come up a fair amount in a divorce process, and one of the things that people often find confusing or surprising is how involved it is to transfer retirement assets as part of the divorce process. So I wanted to speak to that very briefly. 

As we touched on in Episode 15, there are two main types of retirement assets. One type is called a defined benefit plan. The other type is called a defined contribution plan. 

The gist is that there are retirement assets, and this type is far more common, to which you contribute a specified amount of money. That’s like your 401(k) plan or a 403(b) or your IRA. You know how much you’re contributing. Your account has a balance, and that’s how much it’s worth. You have an account with a balance of money, and that’s it. 

The other type of retirement asset is a defined benefit plan, and that’s where, based on a series of variables, like your salary at your employer, how many years you have been serving your employer, you will be entitled to a certain amount of benefit in the future. That’s a less common type of plan, used to be more common, but now is less so. And the quintessential example of that is like a pension where you work for 20 years somewhere or 30 years and you’re entitled to a certain percentage of your salary for, for instance, the last three years of your work at that employer. 

The other thing to be aware of is that with these two types of retirement assets, there are different ways to value the asset. A retirement account like a 401(k) or an IRA, very straightforward. How to figure out the value of them? Just look at the balance. It’s really clear. 

Whereas, with something like a pension, it’s more involved to figure out technically what they are worth today. Sometimes your employer will provide you with a value. Sometimes they’ll provide you with a balance of the account associated with your pension. But for the purposes of a divorce, none of those numbers is necessarily the value of a retirement asset like a pension, and you do need an actuary to value what the present value of your entitlement to a future income stream is. 

If that sounds very confusing, don’t worry about it. You don’t have to figure it out. But if you have a pension or some other kind of defined benefit plan, you will want to have it most likely valued by a professional as part of your divorce. 

When you value, when you come up with the value of your retirement assets, and let’s say you decide, “You know what? Okay, we both have our retirement assets but there’s a big discrepancy between them and we do want to equalize them between us. We want to have the person with more retirement assets make a transfer, let’s say, from their 401(k) to the other person’s retirement account so that we can equalize our retirement,” what happens if you decide that you want to do that? 

The answer to that depends somewhat on the type of retirement accounts you are transferring from. If you’re transferring from what are called qualified retirement accounts, and the 401(k) or 403(b) is the quintessential example of that kind of account, you have a more involved process than you would have if you were transferring from, say, an IRA account or a SEP IRA or what’s called a non-qualified account. 

 

When you’re transferring money from a qualified account like a 401(k), first, you have to get your judgment of divorce signed off on. You have to have a signed judgment of divorce. That’s what you might already be thinking would be the entire end of your process. And it is. It is the end of the dissolution of your marriage. 

But if part of your divorce agreement is that you’re going to transfer retirement accounts from someone’s 401(k) to the other person’s retirement accounts of their selection, you need to first get that judgment of divorce in place. At the same time, you’re going to need to have another professional draft what’s called a qualified domestic relations order, which is basically a court order that instructs the administrator of the plan holding your 401(k) to transfer a set sum of money to your spouse or to the non-titled spouse. 

While you are waiting for your judgment of divorce to be signed off on, you can, at the same time, be having a professional draft the necessary court order to transfer money from your 401(k), and then that draft court order needs to first go to the plan administrator, to the entity that oversees the administration of your 401(k). And they have to approve that order first. You can’t just send it off to the court for signature. You first have to have it approved by the plan. 

Once the court order is approved by the plan and you typically get something like a pre-approval letter back from the plan, when your judgment of divorce has been signed off on, you’ll submit that court order, the additional court order, the one that’s directing the transfer from your 401(k). You’ll submit that to the court along with the approval letter from your plan and the court will sign off on that order. 

Once that happens, you get the order and you submit it to the plan. The plan will then notify both parties, both the titled spouse, the person whose account, in whose name the account is held, and the non-titled spouse, the person who is supposed to be receiving a portion of or all of the assets from the specified account. They’ll notify both of you. 

You’ll have an opportunity to say, “No. Wait a minute. I don’t agree with this order.” But typically, there’s not a problem with the order if it’s correctly drafted. 

And then within about 30 business days, the plan will make the specified transfer. Often, they create a new account within their own entity for the non-titled spouse. So, often the transfer is not made directly to the account of the non-titled spouse’s specification. It sort of goes through a middle step first, which is to be transferred to an account that the plan administrator creates, and then the non-titled spouse can transfer that money wherever they want. 

But suffice it to say, it’s not in a simple or a speedy process to transfer from a 401(k) or a 403(b) or any qualified retirement plan. And for that reason, many people do prefer to each keep their own retirement plans and trade those assets off against other assets, just to avoid the extra work that is required after your divorce is issued in order to transfer from those plans. 

Now, if you’re transferring not from a 401(k) or other qualified retirement plan, but you’re transferring from an IRA, for instance, let’s say you have a SEP IRA that you created because you own your own business or your spouse has one that he or she created, those are easier. Not easy, but easier to transfer from. 

Typically, the entity that holds your SEP IRA or your IRA or your rollover IRA will have some pretty straightforward instructions for the documents that they require for you to transfer from that account. 

They do not require that additional court order that a qualified plan requires, like a 401(k) requires. Generally, what they require is a short form that’s specific to their entity that you need to fill out specifying what’s to be transferred. And then they will almost always require the signed judgment of divorce. And then if the signed judgment of divorce does not specify what is to be transferred but your settlement agreement specifies it, they will also require the relevant language from your settlement agreement specifying this is how much, $50,000, is to be transferred from this IRA to an account specified by the non-titled spouse, the non-owner spouse.

That process, because there are fewer steps to it, is generally faster and overall easier than transferring from a 401(k). 

Certainly if you have the choice to transfer from a 401(k) or from an IRA or rollover IRA, it’s easier to transfer from the IRA. It may not be the right decision from a financial perspective. That would be something to discuss with a financial adviser. But if given the choice, and you are clear that you do want to transfer from your retirement accounts, transferring from your IRA accounts is going to be easier on you and generally faster than transferring from a 401(k) or other similar type of account.

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